Contemplating Insurance

So one of the things that often gets discussed is the level of insurance that you do, or do not, need. This Christmas gave me some time to think about my insurance, and what to do about it (and on the back of a conversation with a work colleague). So a complete essay of mindless drivel follows!

So some of the insurance is a no brainer for me:

Car Insurance. Well I can’t really drive without it so no choice there

Buildings (& contents) insurance. Well a stipulation of my mortgage is that I have buildings insurance so I can’t not, and I have contents insurance as it would not be cheap to replace everything I have here (and I don’t just mean the food and wine :)) – add in clothes, tv, shoes, food, alcohol, white goods etc.

Travel Insurance – as and when needed. In the past I had an annual one, but nowadays as I have cut back on travel I don’t need it as much. That said I would always have some for when I travel, it just isn’t worth the risk not to for me. I have once had the misfortune to need to call on it (that’s a down the pub discussion)

There are also two other insurances that I have at the minute, that I am contemplating if I really do need. Life / Critical Illness insurance, and Income Protection. I am actually over insured on these at the minute as I had an existing policy before I joined my new company. The new company has these, but not to the level I would have liked. And who knows how long I will be at my current company, and if I move, will the new company offer anything similar?

I ended up looking at both if I used my current company one and if not where that would land me.

First up – why do I have these insurances? Simple – as I may have mentioned once or twice before on this blog… we have quite a large mortgage, in fact larger than my other half could cope with if she had to pay the whole lot herself, never mind bills. I want to know that if anything were to happen to me she could remain comfortably in our home without money worries (and she is not yet the best on that side anyway!).

So, Life / Critical Illness insurance. This will pay out a lump sum if I either die or have one of a long list of illnesses, and is sufficient to completely pay off the mortgage.

The Income means if I am out of work for whatever reason (non critical illness) or something else happens, I can continue to pay the mortgage, bills and invest, enjoy life.

I am now in a position where my retirement funds are greater than the outstanding balance of our mortgage, however a large chunk of this is in my pension and so can’t be accessed for some time. So, working backwards…

When I can access my pension at the age of 55, I will be able to use drawdown and this should cover my monthly mortgage cost (and a little bit of bills, but not a lot). This means in reality, I need to look at the time period from now until I hit 55 (or maybe 57 given the governments never ending tinkering).

Realistically this means I need to be able to cover the time through until I can access my pension. To cover this time then the mortgage and bill money needs to come from ISA and cash reserves. For now I will discount cash reserves as they are low at present, but I will gradually increase them. One day I will get to that elusive 6 months of income!

My ISA investments will now cover approximately 10 years of mortgage payments (excluding dividends), subject to volatility. With my current employer this would be sufficient to get me to my pension age, however should I move I will be short by a few years. For these things I always go on a worst case basis, so I am going on the assumption that I will change jobs, or my company will stop the benefit.

This means I am about 2 or 3 years short of mortgage payments. In reality I am adding at least 1 mortgage payment a month into investments and savings, so lets say its 18 months I am short.

If I were to stop my insurance payments, and invest them instead, then in 18 months that would buy 3 more months of mortgage payments, bringing me down to 15 months.

If I were to stop paying the insurance then I would invest the difference into an Investment Trust.

The big question for me is do I risk it? Technically, we could sell up, move to a small property somewhere out of London and be FI already – just not in a lifestyle we would want or be happy with!

If I can cover my side of the mortgage, then we could really tighten the purse strings and survive without moving. Now, if I change jobs (you never know with me!), then I may lose the companies cover which means I will have to cover the whole period.

Right now I am borderline. If I knew I was going to stay in my current company for at least another 3 years then I would just cancel the insurance and throw it into my GTP ISA. I will keep an eye over the next couple of months and then maybe make a decision.

What’s the worst that could happen?

So, flipping it the other way around – what would be the worst case? Suppose I did lose my job and there was no insurance payout – what would I do?

Well first up I would hammer back all expenses to the absolute minimum – no alcohol, tighter food budget (if I am at home I will have time to cook from scratch etc.), and I wouldn’t have to be paying my insurance premiums either. No eating out, no drinking out. I think I could make my cash reserves last probably 8 months when they are back where they should be (right now probably only 5 or 6 months. Sell out my GTP Investment Trust cash replacement would buy me a little longer.

So I could probably stretch to a year before I need to sell anything, in which time I should get dividends to cover another couple of months. Now I would hope by this stage that I would have found another job, or be back earning in some way.

Within this year I would know if I could or could not work again, so assuming I can’t work again then that means we would probably have to make some very tough decisions. In all likelihood we would move out of London, or at least downsize.

As part of the downsizing that would mean we would buy a smaller property with no mortgage and free up a reasonable chunk of cash to generate income. I suspect this would leave me with enough to pay the bills and survive. So from a numbers perspective yes we would be ok, but probably not happy.

So supposing we choose not to sell up? Then I am not quite there yet sadly. I am close I know that much, but still not quite. Cancelling the insurance and investing it would get me there faster, but would remove any peace of mind.

So for now, to help me sleep at night, I will continue to pay the insurance. This time next year however I expect that regardless of where I am working then I will be in a position to cancel it.

6 thoughts on “Contemplating Insurance”

Contents insurance. The other thing that is pretty much always overlooked is contents cover also includes personal liability cover in todays litigious society that can be pretty important if say you are on your bike and injured someone.

Regarding income protection cover I’m assuming there’s no way to flex this at work up to the level you want? I’ve never bought separate criticism cover as our work gives 75% of salary income protection which would be enough. I couldn’t see the point in paying for separate crit illness cover Similarly I cancelled my separate life insurance as although cheap at 25 quid a month I could buy the same level at half that by flexing my work benefits

My mortgage is only 3.5 times my salary so although it feels big its affordable. And if I die my girlfriend gets 6 times salary plus my pension which would be 600000 as it stands now. Shell be well able to live on that!

I guess it’s playing the odds I keep myself reasonably fit and figured if it was that bad I’d be dead and if not the income protection would be sufficient.

Mind you crit Ilness cover pays out on diagnosis so you could view it as a bonus. With survival rates increasing with most diseases now it could bring your retirement plans forward!

In terms of income protection, no there is no way that I can get it up to the cover I need (it only runs for a limited period). So with just that and my savings it would last, however if I move company I will have to take out afresh and the cost will go up. Renewal period is up in March so I may talk through with my IFA about it, but potentially may drop it then as I will be even closer.

Yes, as you say playing the odds. Whilst the payout from the Company would be high, and I can get it to cover the mortgage so I may drop that insurance, but it wouldn’t be enough for my other half to live on.

Yes, the crit illness is a bonus so basically the payout will clear the mortgage the rest will keep the income going.